Immudyne, Inc.CONVERSION LABS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

Table of ContentsTABLE OF CONTENTS

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding our company that include, but are not limited to, projections of earnings, revenue or other financial items; statements of the plans, strategies and objectives of management for future operations; statements concerning proposed new products, services or developments; statements regarding future economic conditions or performance; statements of belief; and statements of assumptions underlying any of the foregoing. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and other sections in this report. Other sections of this report include additional factors that could adversely impact our business and financial performance.

Unless otherwise indicated, information in this report concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. Unless otherwise indicated, none of the independent industry publication market data cited in this report was prepared on our or our affiliates’ behalf.

The forward-looking statements made in this report are based only on events or information as of the date on which the statements are made in this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents we refer to in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

Additional information on the various risks and uncertainties potentially affecting our operating results are discussed in this report and other documents we file with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements.

As used in this report, “Immudyne,” “Company,” “we,” “our” and similar terms refer to Immudyne, Inc., unless the context indicates otherwise.

PART I.I – FINANCIAL INFORMATION

The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.

The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.

Immudyne, Inc.

CONVERSION LABS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these condensed consolidated financial statements.

CONVERSION LABS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Immudyne, Inc. (the “Company”) is a Delaware corporation established to develop, manufacture and sell natural immune support products containing the Company’s proprietary yeast beta glucans, a group of beta glucans naturally occurring in the cell walls of yeast that have been shown through testing and analysis to support the immune system. The Company’s products include once a day oral intake tablets and topical creams and gels for skin application. The Company concentrates its sales and marketing efforts on healthcare professionals, distributors for its all-natural raw material ingredient products and direct-to-consumer sales.

In 2015,Nature of Business

Conversion Labs, Inc., was formed in the State of Delaware on May 24, 1994, under our prior name, Immudyne, Inc. We changed our name to Conversion Labs, Inc. on June 22, 2018. Further, in connection with changing its name, the Company formed a joint venture domiciled in Puerto Rico, Innate Skincare, LLC (“Innate”). Under the terms of the joint venture agreement, the Company held a 33.3% equity interest, and a 51% controlling voting interest, in Innate. On January 20, 2016, Innate amended its limited liability company operating agreement and changed its legal nametrading symbol to CVLB. On April 1, 2016, our majority-owned subsidiary, Immudyne PR LLC (“Immudyne PR”). On April 1, 2016, Immudyne PR further, which was initially formed for the purpose of a joint venture with the original owners of one of our skincare products, amended and restated its operating agreement and restated the Company’swhereby we increased our ownership and voting interest in Immudyne PR increasing its ownership to 78.1667% resulting78.2%. Concurrent with the name change of the parent company to Conversion Labs, Inc. completed in a charge to noncontrolling interest and additional paid-in-capital of $91,612.2018, Immudyne PR was formedrenamed to launchConversion Labs PR LLC (now known as “Conversion Labs PR”). On April 25, 2019, the operating agreement of Conversion Labs PR was amended and restated in its entirety after acquiring the remaining minority interest in the Conversion Labs PR, which is now a complete skin care regime formulated using strategic ingredients provided bywholly-owned subsidiary of the Company.

In June 2018, Conversion Labs closed the second quarterstrategic acquisition of 2017,51% of LegalSimpli Software, LLC, a software as a service (SaaS) application for converting, editing, signing and sharing PDF documents. In addition to LegalSimpli Software’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise to the Company.

In early 2019, the Company also launched a service-based business under the name Conversion Labs Media LLC, which was to be used to run e-commerce marketing campaigns for other online businesses. However, this business was discontinued in 2019 in order to focus on its core business as well the expansion of our telehealth opportunities.

In June 2019, a strategic joint venture with GoGoMeds.com (GoGoMeds) was formed in order to help facilitate the launch of our telemedicine business. GoGoMeds is a nationwide pharmacy licensed to dispense prescription medications directly to consumers in all 50 states and the District of Columbia.

The Company is a direct to consumer response healthcare company that provides a convenient, cost-effective and smarter way for consumers to access high quality Over The Counter (OTC) products and prescription medications. The U.S. healthcare system is undergoing a paradigm shift largely due to new technologies and the emergence of direct-to-consumer healthcare. We believe the traditional model of visiting a doctor’s office, receiving a physical prescription, visiting a neighborhood pharmacy, and returning to see a doctor for follow up care or prescription refills is inefficient, costly to patients, and discourages many patients from seeking much needed medical care. Direct-to-consumer telemedicine companies, like our Company, offer patients immediate and virtual treatment from licensed physicians, and the home delivery of prescription medications, devices and diagnostics bundled with over-the counter wellness products.

We have built a platform that allows us to efficiently launch telehealth and wellness product lines wherever we determine there is a market need. Our platform is supported by a driven team of digital marketing and branding experts, data analysts, designers, and engineers focused on building enduring brands.

Unless otherwise indicated, the “Company” refers Conversion Labs, Inc. (formerly known as Immudyne, Inc.), our wholly subsidiary Conversion Labs PR, LLC (formerly Immudyne PR expanded their product lineLLC, now “Conversion Labs PR”), a Puerto Rico limited liability company (“Conversion Labs PR”) and launched their in-licensed patented hair loss shampoo and conditioner.our majority-owned subsidiary LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LegalSimpli”). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

Liquidity

The Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sales volume and the continued financial support from officers and directors, obtaining funding from third-party sources or the issuance of additional shares of common stock.

The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. At SeptemberAs of June 30, 2017,2020, the Company has an accumulated deficit approximating $10.7$23.7 million and has incurred negative cash flowsexperienced significant losses from continuing operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Based on the Company'sCompany’s cash balance at Septemberas of June 30, 2017,2020, and projected cash needs, for 2017, management estimates that it will need to increasean additional $4.0 million through the next 12 months, either from increasing sales revenue and/or raiseraising additional capital to cover operating and capital requirements forvia the remainder of the 2017 year. Management will need to raise the additional needed funds through increased sales volume, issuing additional sharessale of common stock or other equity securities, or obtaining debt financing. Although management has been successful to date in raising necessary funding, there can be no assurance that sales revenue will substantially increase or that any required future financing can be successfully completed on a timely basis, or on terms acceptable to the Company.

Immudyne, Inc. Based on these circumstances, management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company evaluates the need to consolidate affiliates based on standards set forth in Accounting Standard CodificationASC 810 Consolidation (“ASC”ASC 810”) 810 Consolidation..

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Conversion Labs PR and its majority owned subsidiary, Immudyne PR and variable interest entities (VIE’s) in which the Company has been determined to be the primary beneficiary.LegalSimpli. The non-controlling interest in Immudyne PRLegalSimpli represents the 21.8333%49% equity interest held by other members of the joint venture.subsidiary. All significant consolidated transactions and balances have been eliminated in consolidation.

Variable Interest Entities

The Company follows ASC 810-10-15 guidance with respect to accounting for VIE’s. These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances.

As of September 30, 2017 and December 31, 2016, the Company consolidated nine VIEs.

Immudyne PR as the primary beneficiary of Ace Account Management LLC, Innerwell Skincare LLC, MCD Merchants LLC, One Equity Research LLC, Inate Gems LLC, Retriever Health Products LLC, Spurs 5, LLC, Salus LLC and Huntley LLC which are qualified as VIEs. The assets and liabilities and revenues and expenses of these VIEs are included in the financial statements of Immudyne PR and further included in the consolidated financial statements. As of September 30, 2017, the VIEs had assets of $3,096, liabilities of $10,146, revenues of $1,487, and operating expenses of $2,119. As of December 31, 2016, the VIEs had assets of $10,306, liabilities of $5,748. The assets and liabilities include balances due from and due to the subsidiaries of Immudyne PR. Any inter-company receivables and payables are eliminated upon consolidation of the VIEs with Immudyne PR and Immudyne, Inc. No assets were pledged or given as collateral against any borrowings.

The Company utilizes third party entities to provide and increase credit card processing capacity and optimize corresponding rates and fees. A majority of these entities provide this service as independent contractors in exchange for a one percent (1%) fee of the net revenues processed and collected by such contractors from sales initiated by the Company. The VIEs consolidated in the Company’s financial statements are primarily contracted to provide credit card processing through one or more merchant banks. Upon receipt of funds by each VIE, the collection of receipts less any returns, chargebacks and other fees charged by such merchant bank is transferred to Immudyne PR.

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Use of Estimates

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates required to be made by management include the determination of reserves (if necessary) for accounts receivable, returns and allowances, the accounting for derivatives,useful life of intangible and right of use assets, the valuation of inventory and inputs into the provision for lease liabilities and stockholders’ equity basedequity-based transactions. Actual results could differ from those estimates.

Derivative LiabilitiesReclassifications

Under ASC 815-40-05, Accounting for Derivative Financial Instruments IndexedCertain reclassifications have been made to and Potentially Settled in a Company’s Own Stock,conform the prior year’s data to the current presentation. These reclassifications have no effect on previously reported operations, stockholders’ equity (deficit) or cash flows. Given the increase in the eventCompany’s software business and to conform the Company does not have a sufficient numberCompany’s presentation of authorized and unissued shares of common stockoperating results to satisfy obligations for stock options, warrants and other instruments potentially convertible into common stock, the fair value of these instruments should be reported as a derivative liability. Pursuant to the outstanding option, warrant and convertible debt agreements, there is currently no effective registration statement covering the shares of common stock underlying these agreements, which are currently subject to a cashless exercise whereby the holders, at their option, may surrender their options and warrants to the company in exchange for shares of common stock. The number of shares of common stock into which an option or a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the options or warrant and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that the Company could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if the Company were unable to obtain shareholder approval to increase the number of authorized shares, the Company could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, ASC 815-40-05 requires that the Company record the potential settlement obligation at each reporting date using the current estimated fair value of these contracts, with any changes in fair value being recorded through our statement of operations. The Company had reported the potential settlement obligation as a derivative liability. In the third quarter of 2017, the Company obtained a majority of shareholders’ approval and amended its Articles of Incorporation to increase the number of shares of its authorized common stock, therefore the derivative liability is no longer applicable.

Sequencing Policy

Under ASC 815-40-35,industry standards, the Company has adopted a sequencing policy whereby, inchanged their categories for reporting operations, as result the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 dueCompany has made reclassifications to the Company’s inabilityprior year presentation in order to demonstrateconform it has sufficient authorized shares, shares will be allocated onto the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of authorized but unissued shares, and all future instruments being classified as a derivative liability, with the exception of instruments related to share-based compensation issued to employees or directors. current presentation.

Inventory Revenue Recognition

At September 30, 2017 and December 31, 2016, inventory consisted primarilyThe Company records revenue under the adoption of cosmetic and nutraceutical additives, and finished cosmetic products. Inventory is maintained in the Company’s leased Kentucky warehouse and third party warehouses in Pennsylvania and Louisiana.ASC 606 by analyzing exchanges with its customers using a five-step analysis:

Inventory is valued at the lower of cost or market with cost determined on a first-in, first-out (“FIFO”) basis. Management compares the cost of inventory with the net realizable value and an allowance is made for writing down inventory to market value, if lower. At September 30, 2017 and December 31, 2016, the Company recorded an inventory reserve in the amount of $20,000. Inventory consists of the following:

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Revenue Recognition

TheFor the Company’s policyproduct-based contracts with customers, the Company has determined that there is to record revenue as earned whenone performance obligation and the delivery of this performance obligation is transferred at a firm commitment, indicating sales quantity and price exists, delivery has taken place and collectability is reasonably assured.point in time. The Company generally records sales of nutraceutical and cosmetic additives once the product is shipped to the customer, and for sales of finished cosmetic products once the customer places and pays for the order and the product is simultaneously shipped by a third-party fulfillment service provider, but in limited cases if title does not pass until the product reaches the customer’s delivery site, then recognition of revenue isshould be deferred until that time.time, however the Company does not have a process to properly record the recognition of revenue if orders are not immediately shipped. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, which is usually upon shipment of the product. The Company does sell a subscription based service which is based on the recurring shipment of products and billed as if the Company were receiving recurring revenues and orders each month, therefore, the Company records these upon each shipment to the customer. Provisions

The Company records an estimate for provisions of discounts, returns, allowances, customer rebates and other adjustments for each shipment, and are netted with gross sales. The Company’s discounts and customer rebates are known at the time of sale and the Company appropriately debits net product revenues for these transactions based on the known discount and customer rebates. The Company estimates for customer returns and allowances based on estimates of historical transactions and accounts for such provisions during the same period in which the related revenues are earned. The Company has determined that the population of contracts with customers tends to be homogenous, so that review of the contracts and estimate of various revenue related adjustments can be applied to the entire portfolio population. Customer discounts, returns and rebates approximated $149,000 and $1,578,000 inon product revenues during the ninethree months ended SeptemberJune 30, 20172020 and 2016,2019 approximated $857,000 and $161,000, respectively. Customer discounts, returns and rebates approximated $99,000 and $530,000 inon product revenues during the threesix months ended SeptemberJune 30, 20172020 and 2016,2019 approximated $1,334,000 and $713,000, respectively. There

The Company, through its majority-owned subsidiary LegalSimpli, offers a suite of software to customers as a monthly subscription based service. This suite of software allows the user or subscriber to convert almost any type of document to other editable document type formats for easy editing. For these subscription-based contracts with customers, the Company offers a 14-day trial period which is billed at $1.95 for an initial period, a monthly subscription, or a yearly subscription to the Company’s software. The Company has estimated that there is one product and performance obligation that is delivered over time, as the Company allows the subscriber to access the service for the time period purchased. The Company allows the customer to cancel at any point during the billing cycle, in which case the customers subscription will not be renewed for the following month or year depending on the original subscription. The Company records the sales over the customers subscription period for monthly and yearly subscribers or at the end of the initial 14 day service period for customers who purchased the initial subscription. The Company offers a discount for the purchase of the monthly and yearly subscriptions, which must be paid at the initiation of the contract term, so that the Contract price is fixed at the contract initiation. Yearly and monthly subscriptions for the subscription are no formal sales incentives offered to anyrecorded net of the Company’s customers. Volume discounts mayknown discount rates. As of June 30, 2020 and December 31, 2019, the Company has accrued contract liabilities of approximately $304,000 and $110,000, respectively, which represent obligations on in-process monthly or yearly contracts with customers and yet to be offered from time to time to customers purchasing large quantities on a per transaction basis.recognized initial 14-day trial periods.

For the ninesix months ended SeptemberJune 30, 2017 consisted of nutraceutical2020 and cosmetic additives ($981,356) and finished cosmetic products ($2,602,258). Revenue for2019, the nine months ended September 30, 2016 consists of nutraceutical and cosmetic additives ($757,961) and finished cosmetic products ($3,494,743).Company had the following disaggregated revenue :

Revenue for the three months ended September 30, 2017 consisted of nutraceutical and cosmetic additives ($277,463) and finished cosmetic products ($1,774,271). Revenue for the three months ended September 30, 2016 consists of nutraceutical and cosmetic additives ($229,741) and finished cosmetic products ($1,154,688).

Accounts receivableReceivable

Accounts receivable are carried at original invoicesales amount less an estimate made for holdbacksreturns, chargebacks, and doubtfuldiscounts. Accounts receivables based onmainly consist of receivables from third-party merchant processors which are settled with a reviewcouple of all outstanding amounts.days. Management determines the need, if any, for an allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions and sets up an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. At SeptemberAs of June 30, 20172020 and 2019, the Company had determined that an allowance for doubtful accounts reserve was not necessary. As of June 30, 2020 and December 31, 2016, the accounts receivable reserve was approximately $-0- and $37,800, respectively. As of September 30, 2017 and December 31, 2016,2019, the reserve for sales returns and allowances was approximately $26,000$351,000 and $50,500,$82,000, respectively.

Immudyne, Inc.Inventory

Notes to Consolidated Financial Statements

SeptemberAs of June 30, 2017

(unaudited)2020 and December 31, 2019, inventory consisted primarily of finished cosmetic products. Inventory is maintained at the Company’s third-party warehouse location, which is owned by a related party, in Pennsylvania and at Amazon fulfillment centers.

SegmentsCapitalized Software Costs

The guidanceCompany capitalizes certain payroll and third-party costs related to internally developed software and amortize these costs using the straight-line method over the estimated useful life of the software, generally two years. The Company does not sell internally developed software other than through the use of subscription service. Certain development costs not meeting the criteria for disclosures about segmentscapitalization, in accordance with Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software, are expensed as incurred. As of June 30, 2020 and 2019, the Company capitalized $317,160 and $0 related to internally developed software costs which is included in development. As of June 30, 2020, these costs include $40,000 in capitalized stock based compensation that was given to a third-party service provider. During the three months ending June 30, 2020 and 2019, the Company amortized $11,585 and $0 of capitalized software costs, respectively.

Intangible Assets

Intangible assets are comprised of customer relationship asset and purchased licenses with estimated useful lives of three years and indefinite lived, respectively. Intangible assets are amortized over their estimated lives using the straight-line method. Costs incurred to renew or extend the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.

Impairment of Long-Lived Assets

Long-lived assets are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities (asset group). If the sum of the projected undiscounted cash flows (excluding interest charges) of an enterprise requires thatasset group is less than its carrying value and the fair value of an asset group is also less than its carrying value, the assets will be written down by the amount by which the carrying value of the asset group exceeded its fair value. However, the carrying amount of a public business enterprise report financialfinite-lived intangible asset can never be written down below its fair value. Any loss would be recognized in income from continuing operations in the period in which the determination is made.

Liability to Issue Common Stock

Liability to issue common stock represents liabilities of the Company for failing to issue shares of common stock timely to various consultants and descriptive information about its operating segments. Generally, financial information is requiredor third-party investors in conjunction with various consulting, service, warrant or stock purchase agreements. As of June 30, 2020, the Company has a liability to issue 2,627,635 shares of common stock for $541,972 in fair value. During the six months ended June 30, 3020, the Company received $1,639,000 in cash from investors which was recorded as a liability to issue shares until such time as the shares were issued. The yet to be reportedissued shares of common stock are valued based on the basis used internally for evaluating segment performance and resource allocation. The Company manages its operations in two reportable segments for purposesfair market value of assessing performance and making operating decisions. Revenue is generated predominatelythe common stock price on the date of agreement or the purchase price specified in the United States, and all significant assets are held in the United States, or United States territories.stock purchase agreement.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company allocates resources and evaluates the performance of segments based on income or loss from operations, excluding interest, corporate expenses and other income (expenses).

A summary of the company’s reportable segments is as follows:

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Income Taxes

The Company files Corporate Federalcorporate federal and Statestate tax returns. Conversion Labs PR and LegalSimpli file tax returns while Immudyne PR, which was formed as ain Puerto Rico, both are limited liability corporation, files acompanies and file separate tax returnreturns with any tax liabilities or benefits passing through to its members.

The Company records current and deferred taxes in accordance with Accounting Standards Codification (ASC)(“ASC”) 740, “Accounting for Income Taxes.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating losses and determines the necessity for a valuation allowance. ASC 740 also provides a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return. Using this guidance, a company may recognize the tax benefit from an uncertain tax position in its financial statements only if it is more likely-than-not (i.e., a likelihood of more than 50%) that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

The Company’s tax returns for all years since December 31, 2013,2016, remain open to taxing authorities.

Stock-Based Compensation

The Company follows the provisions of ASC 718, “Share-Based Payment” and ASC 505-50 “Equity-Based Payments to Non-Employees”. Under this guidance compensation cost generally is recognized at fair value on the date of the grant and amortized over the respective vesting periods.or service period. The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of the Company’s common stock shares using weekly price observations over an observation period that approximates the expected life of the options. The risk-free rate approximates the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to limited history of forfeitures, the estimated forfeiture rate included in the option valuation was zero.

Many of the assumptions require significant judgment and any changes could have a material impact in the determination of stock-based compensation expense.

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Earnings (Loss) Per Share

Basic earnings (loss) per common share is based on the weighted average number of shares outstanding during each period presented. The dilutedWarrants and options to purchase common stock are included as common stock equivalents only when dilutive. Potential common stock equivalents are excluded from dilutive earnings per share computation includeswhen the effect, if any, of shares thateffects would be issuable upon the exercise of outstanding stock options, warrants, derivative liability and convertible debt, reduced by the number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period, when such amounts are dilutive to the earnings per share calculation.

The weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive, was 4,907,700 for the three months ended September 30, 2017.antidilutive.

Common stock equivalents comprising shares underlying 9,335,80017,498,953 options and warrants for the ninethree and six months ended SeptemberJune 30, 2017 have not been included in the loss per share calculation as the effects are anti-dilutive. Common stock equivalents comprising shares underlying 12,950,273 options and warrants for the nine months ended September 30, 20162020 have not been included in the loss per share calculations as the effects are anti-dilutive.

Recent Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): ScopeFair Value of Modification Accounting. The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017 but early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adoption of ASU 2016-15.

In February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is in the process of evaluating the impact of the new pronouncement on its consolidated financial statements. At this time, the adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial statements or related disclosures.

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

Recent Accounting Pronouncements (continued)

In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting guidance, "Revenue from Contracts with Customers." The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and clarify guidance for multiple-element arrangements. The standard will be effective for fiscal years and interim periods within those years beginning after December 15, 2017. Accordingly, the Company will adopt this standard in the first quarter of fiscal year 2018. The Company does not expect it to have a material effect on the Company's consolidated financial condition, results of operations, and cash flows because the Company’s business focuses on e-commerce retail sales and commercial sales that do not use written contacts, rather the use of implied contracts recognizing the sale when goods are ordered on our e-commerce platform or invoiced, respectively.

All other accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Noncontrolling Interests

The Company accounts for its less than 100% interest in Immudyne PR in accordance with ASC Topic 810, Consolidation, and accordingly the Company presents noncontrolling interests as a component of equity on its consolidated balance sheet and reports the noncontrolling interest’s sharecarrying value of the Immudyne PR net loss attributable to noncontrolling interests inCompany’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses and the consolidated statementface amount of operations.notes payable approximate fair value for all periods.

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

ConcentrationConcentrations of Credit Risk

The Company grants credit in the normal course of business to its customers. The Company periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk.

The Company monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company, at times, maintains balances in various operating accounts in excess of federally insured limits.

One customer in the nutraceutical and cosmetic additives division accounted for 13% and 13%We are dependent on certain third-party manufacturers, although we believe that other contract manufacturers could be quickly secured if any of consolidated sales for the three-month periods ended Septemberour current manufacturers cease to perform adequately. As of June 30, 2017 and 2016, respectively. This customer accounted for 25% and 2% of consolidated sales for the nine month periods ended September 30, 2017 and 2016, respectively. This customer also accounted for 36% and 11% of the consolidated accounts receivable at September 30, 20172020 and December 31, 2016, respectively.2019, we utilized two (2) suppliers for fulfillment services, two (2) suppliers for manufacturing finished goods, one (1) supplier for packaging and bottles and one (1) supplier for labeling. For the three and six months ended June 30, 2020 and the year ended December 31, 2019, we purchased 100% of our finished goods from two (2) manufacturers.

Recently Adopted Accounting Pronouncements

In June 2018, the finished cosmetic products division, noneFASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” that expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the credit card processors hadrequirements of ASC Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. We do not expect the implementation of this new pronouncement to have a significant concentration of accounts receivable at September 30, 2017. In the finished cosmetic products division, two credit card processors accounted for 35% and 32% of thematerial impact on our consolidated accounts receivable at December 31, 2016.financial statements.

In July 2017, the third quarterFASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815)- Accounting for Certain Financial Instruments with Down Round Features” (“ASU 2017-11”). Equity-linked instruments, such as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis of 2016the pricing of future equity offerings. Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share (“EPS”) reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This standard was adopted on January 1, 2020 and did not have a material impact on the Company’s financial position, results of operations or cash flows.

Recent Accounting Pronouncements

All other accounting standards updates that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 3 – INTANGIBLE ASSETS

As of June 30, 2020, the Company commenced an offering pursuanthas the following amounts related to which it offered 11% subordinated promissoryintangible assets:

As of December 31, 2019 the Company has the following amounts related to intangible assets:

The aggregate amortization expense of the Company’s intangible assets for the three months ended June 30, 2020 and 2019 was approximately $83,903 and $83,903, respectively. The aggregate amortization expense of the Company’s intangible assets for the six months ended June 30, 2020 and 2019 was approximately $167,806 and $167,806, respectively. Estimated amortization expense for 2020 and 2021 is approximately $336,000 and $140,000, respectively.

NOTE 4 – NOTES PAYABLE

On May 29, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Alpha Capital Anstalt (“Alpha”) and Brio Capital Master Fund Ltd. (“Brio”). Pursuant to the terms of the Purchase Agreement, the Company issued and sold to them senior secured convertible notes in fifty thousand ($50,000) dollar increments combined with 62,500the aggregate original principal amount of $550,000 (collectively, the “Alpha and Brio Notes”), and warrants to purchase up to 2,391,305 shares of the Company’s common stock (collectively the “Alpha and Brio Warrants”). The Alpha and Brio Notes matured on May 2019. Interest on the outstanding principal amount of the Alpha and Brio Notes compounded annually at the annual rate of twelve percent (12%), subject to adjustments. The Alpha and Brio Notes are convertible into the Company’s common stock, at the option of the holder, at any time following issuance, unless the conversion or share issuance under the conversion would cause the holder to beneficially own in excess of 4.99% of the Company’s common stock. The conversion price for the principal and interest, if any, in connection with voluntary conversion by the Holder shall be $0.23 per share of Common Stock, for a maximum offering amountsubject to adjustment as defined in the Alpha and Brio Notes. Alpha and Brio have converted $344,642 of $200,000 (the “Offering”). Inthese notes including $9,922 of interest as of December 31, 2019 and 2018. As of June 30, 2020, these notes have been paid off.

On August and September 2016,15, 2019, the Company sold promissory notes totaling $150,000entered into securities purchase agreements (the “August Purchase Agreements”) with three accredited investors, including Alpha and Brio. Pursuant to three unrelated individuals. Twothe terms of the promissory notes totaling $100,000 were payable in February 2017 and one promissory note for $50,000 was payable in March 2017. In October 2016, the Company sold promissory notes totaling $50,000 to two unrelated individuals. These promissory notes are payable in October 2017. In connection with these promissory notes sold, pursuant to the Offering,August Purchase Agreements, the Company issued 250,000and sold to the investors convertible promissory notes for the aggregate original principal amount of $1,291,500 (collectively the “August 2019 Notes”), and warrants to purchase up to 4,679,348   shares of the Company’s common stock (the “August 2019 Warrants”). The August 2019 Notes mature on August 15, 2020 and accrue interest at a rate of twelve percent (12%) per annum, subject to adjustments as defined therein. The August 2019 Notes may be converted into shares of the Company’s common stock, at the discretion of the holder, at any time following issuance, unless the conversion or share issuance under the conversion would cause the holder to beneficially own shares in excess of 4.99% of the Company’s common stock. The conversion price for the principal and interest, if any, in connection with voluntary conversion by the investors shall be $0.23 per share of common stock, valued at $58,750subject to adjustment as defined therein. In conjunction with the August 2019 Notes, the Company issued the August 2019 Warrants with an exercise price of $0.28 per share. The fair value of August 2019 Warrants was determined to be $569,147 based on using the Black-Scholes pricing model. The August 2019 Warrants were evaluated by management and deemed to be equity-linked awards subject to ASC 810, Derivatives and Hedging. The August 2019 Notes contained an original issue discount of 20% or $215,250 which is the difference between the note face amount of $1,291,500 and the cash proceeds received from the investors. As part of this financing, the Company paid debt issuance costs $284,070 which are placed as a contra-debt account and amortized over the life of the loan.

On February 25, 2020, the Company entered into a Note Repayment and Warrant Amendment Agreement with Alpha and Brio, whereby the Company agreed to repay the outstanding balance of Alpha and Brio’s August 2019 Notes in the amount of $1,291,000, including principal and interest. As a result of this transaction, the Company accelerated debt discounts for warrants, issuance costs and original issue discount of $500,145, which was recordedrecognized through interest expense on the accompanying consolidated statement of operations. As of June 30, 2020 and December 31, 2019, the gross balance payable for these notes was $0 and $1,291,000, respectively. As of June 30, 2020 and December 31, 2019, the Company has cumulatively amortized $568,322 and $404,393 of the debt discounts costs including debt issuance costs, original issue discount, and discount for warrants issued in connection with the debt transaction, all of which is included in interest expense on the accompanying consolidated statement of operations. As of June 30, 2020 and December 31, 2019, the net balance payable for these notes was $0 and $627,426, respectively.  

On February 18, 2020, the Company entered into two purchase agreements (the “C6 Purchase Agreements”) for the purchase and sale of future revenue with C6 Capital, LLC (“C6”). Pursuant to the terms of the C6 Purchase Agreements, the Company issued and sold to C6 two loan agreements   in the aggregate original principal amount of $1,020,000. These loans contain an original purchase discount of 18%, or $270,000, in total, or $135,000 per agreement. C6 paid $375,000 per loan agreement for a total of $750,000. The Company paid debt issuance costs to C6 of $7,500 per agreement, or $15,000 in total, which was placed as a debt discountcontra-debt account and will be amortized over the life of the loan. The loan agreements require the Company to pay all future receipts of the Company without recourse until such time as the purchased amount has been repaid. The loan agreements require the Company to make a daily average payment of $8,094 during the term of such agreements. As of June 30, 2020, the Company has made $161,904 in principal payments under these notes. Amortizationloan agreements. As of June 30, 2020, the gross balance payable for these loan agreements was $858,000, and the balance of the debtloan net of discounts forwas $600,424. For the ninethree months ended September 30, 2017 was $25,035. There was no amortizationMarch 31, 2020, the Company has amortized $27,329 of debt discount duringthrough interest expense on the third quarteraccompanying statement of 2017. During 2016,operations.

Beginning May 21, 2020 through May 27, 2020 the Company, repaid $68,600issued convertible promissory notes (the “May 2020 Notes”) to six (6) accredited investors (each a “May 2020 Investor”, and collectively, the “May 2020 Investors”). The aggregate principal amount of the principal balance. Interest expense related to these notesMay 2020 Notes is $1,000,000 for the nine months ended 2017 amounted to $131,117. During 2017,which the Company repaid $81,420received gross proceeds of $1,000,000. The May 2020 Notes are due and payable six months from the date of issuance. The May 2020 Notes entitle each holder to 12% interest upon Maturity. The May 2020 Notes may be converted into shares of the principal balance and converted the remaining balance of $49,980 into 196,000 shares ofCompany’s common stock and 98,000 warrants, which satisfiedat any time following the note in full. The fair market value of the shares and warrants issued upon conversion was determined to be $179,384, of which $129,404 was included in interest expense as loss on settlement of notes payable.

Immudyne, Inc.

Notes to Consolidated Financial Statements

September 30, 2017

(unaudited)

In December 2016, the Company borrowed $100,000 from an officer and issued a convertible promissory note with a maturity date of February 28, 2017. The loan incurs no interest. This note is convertible if not repaid by the maturity dateissuance at a conversion price of $0.23$0.50 per Unit. Each Unit shall consistshare, subject to adjustment.

As an inducement to enter into the transaction, the Company issued an aggregate of one share665,000 shares of the Company’s restricted common stock and one three-year common-stock warrant to purchase one-halfthe May 2020 Investors. In the event of one share ofa default the Company’s common stock with an exercise price of $0.40 per share. In March 2017, the Company repaid the entire outstanding balance of this note.

In January 2017, the Company borrowed $200,000May 2020 Notes shall increase to 130% and issued a promissory note with a 5% original issue discount for a total principal amount of $210,000. The loan incurred 11% interest per annumshall become immediately due and matured in various tranches from February 2017 through April 2017. In addition,payable upon notice to the Company issued 217,391 shares of common stock related to this note. In February 2017, the Company repaid $70,000 of the principal balance of this note. In March 2017, the Company converted the remaining $140,000 of the principal balance of this note and accrued interest of $2,212 in exchange for 559,179 shares of common stock and 304,348 warrants which satisfied the note in full. The fair market value of the shares and warrants issued upon conversion was determined to be $566,030, of which $423,818 was included in interest expense as loss on settlement of notes payable.

In February 2017, the Company borrowed $25,000 from an American Express working capital line with 60 days maturity. The interest for this loan is a flat fee of $250. On April 17, 2017, the Company repaid this loan. In June 2017, the Company borrowed $74,043 from an American Express working capital line with 90 days maturity. The interest for this loan is a flat fee of $1,111. On August 30, 2017, the Company repaid this loan. In September 2017, the Company borrowed $77,333 from an American Express working capital line with 90 days maturity. The interest for this loan is a flat fee of $1,160. As of September 30, 2017, there were approximately $60,000 available borrowings under the working capital line.

Interest expense related to loans from officers, directors and other related individuals amounted to $1,713 and $313 for the nine month periods ended September 30, 2017 and 2016, respectively. There was no interest expense for the three months ended September 30, 2017 and 2016 related to loans from officers, directors and other related individuals as there were no loans outstanding during the three months ended September 30, 2017.Company.

Total interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $650,718$1,021,914 and $15,805$300,000 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. Total interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $1,111$228,875 and $9,992$129,826 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.